1) Common Law – in most jurisdictions, contract law is not codified, and thus the primary source of general contract law is caselaw.
2) Restatement – written by the American Law Institute to provide guidance to the bench and bar, the Restatement of Contracts (currently in the second edition) has no legal force but nevertheless provides highly persuasive authority.
3) Uniform Commercial Code (UCC) – created under the auspices of the American Law Institute and the National Conference of Commissioners on Uniform State Laws, has been adopted by every state except Louisiana. Proposed revisions to Article 2, governing contracts for the sale of goods, have been finalized and presented to the states for enactment.
Types of Contracts
Contract may be of the following types:
1) Express – an agreement manifested by words
2) Implied-in-fact – an agreement manifested by conduct
3) Implied-in-law (“quasi-contract”) – not a true contract but an obligation imposed by a court despite the absence of a promise in order to avoid an injustice
4) Unilateral contracts are those involving an exchange of a promise for a performance.
5) Bilateral are those involving an exchange of promise.
What is a Contract?
A contract is a promise or set of promises for the breach of which the law gives remedy.
· Not every promise is legally enforceable.
· A contract must have consideration to be enforceable. With some exceptions LISTED BELOW
A promise is legally enforceable where it:
was made as part of a bargain for valid consideration;
reasonably induced the promisee to rely on the promise to his detriment; or
is deemed enforceable by a statute despite the lack of consideration.
Consideration is the receipt by the promisor of something of value from the promisee.
· Consideration requires a performance or return promise that is bargained for. A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise.
· Consideration requires a bargained exchange in which each party incurs a legal detriment.
A promise to make a gift in the future is not enforceable. Seeing it is voluntary a person is allowed to change their mind.
Gratuitous promises miss the critical element of exchange therefore lack consideration and are not enforceable. Exception: detrimental reliance
Consideration as Benefit or Detriment
A legal detriment exists where the party:
· engages in an act that the party was not previously obligated – whether statutorily or contractually – to perform; or
· refrains from exercising a legal right
Under the pre-existing duty rule, a promise regarding a pre-existing obligation to the other party does not constitute a legal detriment.
Hamer v. Sidway (I) – Only a valuable consideration will uphold an executory (not yet completed) contract. The consideration must be something of value, something either beneficial to one party or disadvantageous to the other, in a pecuniary (money) sense.
Assent + Consideration = Contract
Assent – a parties agreement on a specified deal
Hypo 1: Student promise to walk dog on a Wednesday but did not walk the dog. ([A gift] No consideration)
Hypo 2: Student promise to walk dog and teacher promise to pay $30. Student did not walk dog. ([For money] There is consideration: walking è$30)
Hypo 3: Teacher as student to walk dog on Wednesday. Teacher offers extra 30 minutes tutor session. Student did not walk dog. ([For service] there is consideration: walking è30 minutes tutor)
Hypo 4: Teacher ask student to walk dog, student agree. Teacher says she will pay student a penny. ([For money] No consideration Pretense or sham is not a contract)
Hypo 5: Teacher ask student to walk dog, student agree. Teacher says she will pay by giving student her son goalie glove for her nephew. ([For glove] There is consideration: walking èglove)
Hamer v. Sidway (II) – A valuable consideration in the sense of the law consists either of some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other. Courts will not ask whether the thing which forms the consideration does in fact benefit the promisee or a third party, or is of any substantial value to anyone. It is enough that something is promised, done, forborne or suffered by the party to whom the promise is made as consideration for the promise made to him.
· Consideration means not so much that one party is profiting as that the other abandons some legal right in the present or limits his legal freedom of action in the future as an inducement for the promise of the first.
In general a waiver of any legal right at the request of another party is a sufficient consideration for a promise. Any damage, or suspension, or forbearance of a right is sufficient to sustain a promise.
Forbearance of Claims and Defenses
Surrender of a validly disputed claim – one for which there is a factual or legal uncertainty as to its merits – or the release of a validly asserted defense is sufficient consideration for a return promise. Forbearance of an invalid claim or defense may also serve as consideration if the proponent of such claim or defense had a good faith belief in its validity and if there exists an objective uncertainty as to its validity.
Dougherty v. Salt – Nothing is consideration that is not regarded as such by both parties. The note was the voluntary and unenforceable promise of an executory gift.
Consideration as Bargain
Consideration is a bargained-for performance or return promise which is given by the promisee in exchange for the promisor’s promise. Consideration need not be furnished by or to the parties themselves as long as it is part of the bargained exchange.
Even if the promisor’s promise induced performance or a return promise by the promisee, if such inducement was not sought by the promisor, there is no bargained exchange. In such circumstances, the promise is merely an unenforceable gift.
§ 71. Requirement Of Exchange; Types Of Exchange
(1) To constitute consideration, a performance or a return promise must be bargained for.
(2) A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise.
(3) The performance may consist of
(a) an act other than a promise, or
(b) a forbearance, or
(c) the creation, modification, or destruction of a legal relation.
(4) The performance or return promise may be given to the promisor or to some other person. It may be given by the promisee or by some other person.
b. “Bargained for.” In the typical bargain, the consideration and the promise bear a reciprocal relation of motive or inducement: the consideration induces the making of the promise and the promise induces the furnishing of t
, or any, value. It means a negotiation resulting in the voluntary assumption of an obligation by one party upon condition of an act or forbearance by the other. Consideration thus insures that the promise enforced as a contract is not accidental, casual, or gratuitous, but has been uttered intentionally as the result of some deliberation, manifested by reciprocal bargaining or negotiation.
United States v. Meadors – There is consideration when each promise is or performance has been bargained for, when each has been offered as inducement for the other. Just as the promisor’s purpose must be to induce an exchange, so the promisee purpose must be to take advantage of the proposed exchange.
Meincke v. Northwest Bank &Trust Co. (I) – Under the benefit detriment test there would be consideration. But the court used bargain theory no consideration (sham inducement). Consideration requires the voluntary assumption of an obligation by one party on the condition of an act or forbearance by the other. If a detriment to a party is serving as the consideration, it must appear that the disadvantage was suffered at the request of the promisor, express or implied. A reciprocal inducement or a bargained for exchange is required for a finding of consideration. Both parties must manifest an intent to induce the other and be induced by the transaction for there to be bargained for consideration.
Meincke v. Northwest Bank & Trust Co. (II) – It is presumed that an agreement, which has been written and signed, is supported by consideration. A failure of consideration is a defense to enforcing a contract that must be proven by the party asserting the defense. Consideration can be either a legal benefit to the promisor, or a legal detriment to the promisee. For consideration to be “bargained for,” the consideration must “induce” the making of the promise. (sect 71 com B) It must appear that the disadvantage was suffered at the request of the promisor, expressed or implied. The question is whether the benefit or the detriment was bargained for and there is substantial evidence that the consideration was bargained for.
Distinguishing Bargain from Conditional Gift
Tomczak v. Koochiching County Highway Dept. – The court held a contract required valid consideration, and a gratuitous conditional promise was unenforceable. Because appellants’ promises were of no benefit to respondent and were for the purpose of enabling appellants to receive a benefit from respondent, the court held there was no consideration for respondent’s promise, and thus no contract was formed.
Pennsy Supply, Inc. v. American Ash Recycling Corp – Grounding contracts and warranty claims brought by the disposer, constitutes sufficient ground for relief of a manufacturer’s legal obligation, to dispose of a material classified as hazardous waste, such that the cost of disposal is avoided by the manufacturer.